September 30, 2024
The Sound Shore Fund Investor Class (SSHFX) and Institutional Class (SSHVX) advanced 6.70% and 6.74%, respectively in the third quarter of 2024 ahead of the Standard & Poor’s 500 Index (S&P 500) which advanced 5.89% and trailing the Russell 1000 Value Index (Russell Value) which advanced 9.43%. Stepping back a bit, our year-to-date returns of 21.07% for SSHFX and 21.22% for SSHVX remain ahead of the Russell Value’s return of 16.68% and trail the S&P 500’s return of 22.08%. The three year annualized advances for SSHFX of 10.08% and for SSHVX of 10.29% were also ahead of the Russell Value’s 9.03% and trailed the S&P 500’s 11.91%. As long-term investors, we highlight that Sound Shore’s 35 year annualized returns of 10.00% and 10.29%, for SSHFX and SSHVX respectively, as of September 30, 2024, were ahead of the Russell Value at 9.71% and behind the S&P 500 at 10.59%.
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After months of speculation about when and how much, the Federal Reserve cut interest rates in September by 50 basis points. Lower rates proved a respite for the “bond proxy” utility and real estate sectors, as they finished higher while energy, and believe it or not, technology stocks lagged on signs of slower industrial activity. Election cycles often can manifest a defensive stock market and despite higher equity returns, we are seeing that play out with recent sector performance. Meanwhile, from the bottom up, companies are increasingly getting credit from the market for creating their own tailwinds, which matches well with our stock-specific strategy. As a result, the market continued to broaden and our returns were similarly driven by stocks in a variety of industries, some of which we detail below.
For example, global gold and copper miner Barrick Gold rose after posting earnings that topped forecasts driven by improved cost performance as well as higher metals prices. We initiated our investment earlier this year when the stock was trading at below normal price to earnings and price to book valuations. The depressed valuation was largely due to long-term issues driven by poor acquisitions and shorter-term inflationary pressures that had been a drag on profitability. Following Barrick’s 2019 merger with Randgold, the latter’s senior management team took the reins and have since streamlined and optimized the company’s once sprawling asset base. Today, Barrick is set to improve operations and drive organic growth which, along with a better price environment, we believe should improve returns on capital. Bolstered by a nearly debt-free balance sheet and strong free cash flows, the company is well positioned to increase dividends, share buybacks and improve its valuation.
Similarly, a strong earnings report helped advance life science tools leader Avantor. Improved margins and growth in its bioprocessing business drove the earnings beat. The company is near the end of an inventory correction related to supply chain disruptions during the pandemic. Returning to growth will showcase the quality of Avantor’s business. Avantor enjoys greater than 85% of revenues in typically steady consumables and services businesses. Trading at a discount to peers at 17 times normalized earnings, the company remains a full position.
In recent letters we have discussed the resurgence of nuclear power as a base load electricity source and the opportunities our team has uncovered in the power generation space. Public Service Enterprise Group, better known as PSE&G, is another example and one of our strongest contributors for the three-month period. The company is a “hybrid” regulated utility and unregulated nuclear power generator that we were able to purchase at an attractive price relative to its earning power. PSE&G’s well managed, regulated utilities provide consistent returns that we expect will grow steadily with their rate bases. As well, we believe there is unappreciated value in their nuclear plants which sit in an unregulated subsidiary that can capture the upside potential of increased power prices. Carbon-free and reliable electricity commands a premium in the marketplace, as seen in recently announced 20-year long data center sales contracts by peer companies. Presently, PSE&G is in discussions to do the same. Our projections estimate a potential 20% or more upside to earnings for PSE&G from here over the next few years.
Meanwhile, detractors of note for the quarter were connected by a common theme: signs of a slowing economy. NXP Semiconductors, a leading chip maker for the auto industry, was lower on uncertain auto demand and package hauler FedEx lagged on muted volume trends. Importantly, both of these companies have ways to increase earnings outside of the business cycle, but are not entirely immune to the recent slowdown. Business cyclicality requires investor patience and a long-term perspective - we have both.
Looking ahead, the US elections and Federal Reserve action will likely top a litany of factors on investors’ minds. As always, we look for more than one way to win by focusing on attractively priced, out-of-favor stocks where managements are building value not yet recognized by “Wall Street.” We are encouraged that stock performance based upon company-specific fundamentals seems to be more characteristic of recent markets as the adjustment to higher interest rates continues apace. We note that at September 30, 2024 Sound Shore’s portfolio had a forward price-earnings multiple of 11.5 times consensus, a meaningful discount to the S&P 500 at 21.5 times and the Russell Value at 16.5 times, despite strong balance sheets and free cash flow.
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Important Information
An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Mid Cap Risk: Securities of medium sized companies may be more volatile and more difficult to liquidate during market downturns than securities of large, more widely traded companies. Foreign Securities Risk: The Fund may invest in foreign securities primarily in the form of American Depositary Receipts. Investing in the securities of foreign issuers also involves certain special risks, which are not typically associated with investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers including increased risks of adverse issuer, political, regulatory, market or economic developments, changes in currency rates and in exchange control regulations. The Fund is also subject to other risks, including, but not limited to, risks associated with value investing.
The Adviser analyzes risk on a company-by-company basis. The Adviser considers governance as well as environmental and social factors (ESG) as appropriate. While valuation, governance, environmental and social factors are analyzed, the evaluation of all key investment considerations is industry- and company-specific. Consequently, no one issue necessarily disqualifies a company from investment and no individual characteristic must be present prior to investment.
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
The views in this letter were those of the Fund managers as of 9/30/24 and may not necessarily reflect their views on the date this letter is first published or anytime thereafter.
This commentary may contain discussions about certain investments both held and not held in the portfolio. Current and future portfolio holdings are subject to risk. For the Fund’s Top 10 Holdings click here.
You should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The summary prospectus and/or the prospectus contain this and other information about the Fund and are available from your financial intermediary or www.soundshorefund.com. The summary prospectus and/or prospectus should be read carefully before investing.
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